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Economic houses upon the sand.

The old verities of economics, outstripped by events, are revealed as impostures. Perhaps the most basic imposture is that of supposing economics a science capable of the precision and predictability of the physical sciences. Upon this sandy foundation were erected numerous structures of modeling and forecast, great gleaming houses of impressive design and craftsmanship; but, like the old Sunday School song, when the rain came down and the floods came up, the houses on the sand went SPLAT!

There is, to begin with, the elaborate infrastructure of probabilistic modeling that forms the basis of all fixed-income assets; which assets form the basis of virtually all portfolio management, thus establishing the framework of world capital markets. The vast majority of bonds, whether simple and ancient (corporate debt) or new and exotic (credit derivatives), are priced by comparing their interest yield to “risk-free” government bonds. It is not too much to say that this fact precludes the possibility of a balanced US government budget. The private economy, especially at the highest level of importance, entirely depends on the government running a deficit. Without the regular issuance of US Treasury bonds, capital markets would be thrown into chaos. Investors would lack the indispensible underpinning for classical economics: the pricing mechanism.

It is important to recognize that this feature of modern capitalism was not a consequence of government meddling but of spontaneous order of a Hayekian variety. It was a natural development of private actors operating in a cooperative capacity for mutual benefit. The price mechanism is no trivial matter. As securities markets matured from an insular preserve of cigar-chomping magnates into the conduit for credit formation (matching borrowers with lenders as private enterprise demanded much larger sums of capital for its operations), with new instruments being developed all the time, a stable method of pricing was more than a felt need. It was an absolute prerequisite. As a friend puts it, “There's just a term in all of the equations where you have to plug in a risk-free interest rate from some specific point on the yield curve. US govt debt prices happen to be the best real-world proxy for that theoretical value.” Government bonds generally being the most staid and predictable investment instrument, it was natural that they would form the basis for this price.

But there’s a problem. US Treasury debt is not, in fact, risk-free. That is to say, even the nearest approximation of the theoretical value remains but an approximation. And it remains an approximation in large part because non-linear factors like human psychology impinge upon it. A mathematical structure depends, in the end, on unpredictable human things like sentiment and intuition. The scientific precision of economics is an illusion. This is why I strongly prefer the term “political economy.” As John Medaille notes in his excellent bookToward a Truly Free Market, the decision to drop the modifier (for “political economy” is in fact the oldest term) was a deliberate one designed to emulate hard science precision and thus gain its prestige. An ancillary design was to abstract out the persistent philosophical questions of distribution, justice, fairness, etc. If economics could become a hard science, with all the clinical objectivity of physics or chemistry, why, then we could have done with all this messy business human motives and human ends and human duties. We could talk merely about the world as it is and leave to the philosophers those thorny and interminable disputes about the way it ought to be.

So the “old verities” of economics are not verities at all but rather approximations. Politics and philosophy cannot be abstracted from the student of economics. Government bonds are not always risk-free. Easy money does not always produce inflation. Human psychology intrudes in disruptive ways. We have all witnessed in recent years the consequences of overestimating the exactitude of our economic science.

Comments (43)

First, and in an uncharacteristically ungrinch-like manner, allow me to thank Paul for a welcome change in tone at W4 with this post.

Back to being me,

"As John Medaille notes in his excellent book Toward a Truly Free Market, the decision to drop the modifier (for “political economy” is in fact the oldest term) was a deliberate one designed to emulate hard science precision and thus gain its prestige."

Several well known universities (Berkeley, Santa Barbara, Georgetown, Northwestern, Penn, etc.) have a political economy major so the term is far from dead. Delong, Thoma, Krugman, etc. definitely do political economy. The implications of Keynesian economics - e.g. cyclically balanced budgets as opposed to annually balanced ones - definitely tilt to the political side of the term. It was the "forgetting" of the verities that got us into this mess.

This ties in with what has always been my most substantial criticism of economists and theories that rely on economics: they only make sense if everyone in the world is either a criminal or an economist.

That must be so since some highly credible sources argue we're in an inflationary cycle, and some highly credible sources argue we're in a deflationary cycle. That the head of the department that sets the rate is a political appointment may account for why many think we have much higher inflation than is reported since food and other basic things are excluded. Housing is going down, but that was inevitable because of the ugly and unsustainable upside.

Paul, do you think we've experienced inflation or deflation the last few years, and which way do you see us trending?

1) I'm generally sympathetic to your broader project of emphasizing the political or moral aspects of "economic science" but this specific example seems like a strange way to make the point. I mean, don't you think the market would find another way to price "risk-free" investments if government bonds weren't around? I suspect that the market is smart enough to come up with other proxies.

2) Related to this same idea of the flaws inherent in "economic science", one of my favorite writers, Jim Manzi, has been on a roll lately:

I'd say we experienced marked asset inflation in a handful of important asset classes from 2002-06, and then a sharply deflationary environment since then, feature bouts of hair-raising flight from certain assets very much reminiscent of a classic deflationary bank run.

It is important to recognize that this feature of modern capitalism was not a consequence of government meddling but of spontaneous order of a Hayekian variety.

If one replaced "meddling" in this sentence with "actions contrary to the most hard-nosed free market economists' recommendations," it would, as far as I can tell, be flatly false. And if the federal govt. hadn't set up the whole govt. debt-fiat money system, there would be no such pricing mechanism for corporations to choose to use.

Let me expand on that a bit: Any free market writer will tell you that when the government _does things_ people then freely act to take those government actions into account. Those actions might not be called "meddling," if one reserves that term for, say, increased regulation. The actions could be make-work job programs or subsidies for government-favored industries. The claim is that such subsidies, etc., cause misallocation of resources by subsequent free economic actions. If the government decides to massively subsidize tulip production, people will then start tulip farms, or whatever.

It is simply perverse to call the fact that people start investing in tulip farms when the government decides to subsidize tulip growing "spontaneous order of a Hayekian variety," as if we should all just whistle past the fact that this "spontaneous order" got kicked off in the first place by the government decision to start pouring money into a new bubble industry that the government felt warm and fuzzy about! In fact, the subsequent "spontaneous order" (major over-investment in the tulip industry) would be the very misallocation of resources that the free marketers predicted! It certainly wouldn't be some sort of evidence against their position.

In the same way, simply to ignore the entire fact that the perverse monetary system we presently have is government created, to point to the fact that market forces pick up on its existence and are influenced by it, and to call this subsequent influence "Hayekian spontaneous order," is very strange indeed.

Paul, thanks for the explanation. One other thing regarding inflation though, doesn't easy money always produces some type of inflation? The WSJ was screaming for years that interest rates were too low and that it would produce a housing bubble. Of course I realize other causes such as exempting housing from capital gains, and forcing banks to loan to those they otherwise might not, but I thought it all revolved around easy money.

Lydia, I don't think you're quite following me here. Governments have been issuing debt to fund their activities for centuries. One of Alexander Hamilton's first activities as Treasury Secretary, for instance, was to regularize all the debt issuances of the several states. I'm not aware of economists "hard-nose" or otherwise, who opposed this activity as such.

So government securities are hardly some newfangled modern innovation accomplished by Keynesians. And Keynesian deficit spending was an established fact long before fix-income securities expanded to modern proportions. Nor can we blame the Federal Reserve for the development, for it predates modern securities trading by a half century and more. What is new is the modern securities trade, which arose out of modern computing power, communications technology and probabilistic modeling.

It arose out of the spontaneous cooperative decisions of private actors working out their profit-making enterprises.

I would resist the "always," but I'm fine with "usually." What I perceive right now is that aggregate demand has fallen off so much since 2008 that it simply dwarfs whatever new currency has been injected into the economy. There are also the deflationary influences of deleveraging, at both the level of business and the level of individuals. All those millions of home refinancings, the higher savings rate, the paying off student loans before spending on consumer goods, etc. -- all this is decisively deflationary, and simply overwhelms the inflationary factors.

Food prices are rising largely because their futures prices are rising, which they're doing because the usual suspects, ie., usurers and speculators, are pouring money into commodities, all in that search for yield. If one wishes to halt it, one could proscribe all trading in futures by anyone not directly connected to the commodity in question - anyone other than the farmers and those who directly acquire and refine the crops. No Government Sachs driving up commodities futures to make money, least of all by trading their own book. I won't hold my breath.

Paul, I really doubt that you are implying that the level of U.S. federal debt at the time of Alexander Hamilton, in the context of the monetary system at the time of Alexander Hamilton, would ever or could ever have played the role that you are ascribing to U.S. government bonds in the present economy. If not, then bringing up the time of Hamilton is a bit irrelevant. Surely scale of debt and a complete and drastic change of the very nature of money seem like they would make some difference. The fact that further changes--e.g., the development, as you say, of modern computing power--were necessary before the _government actions_ in vastly increasing the federal debt, creating the federal reserve and its role, etc., had the effects you describe and came to have the role you describe does not change the fact that these were necessary government actions for those effects. Thus to make out that those effects are somehow a spontaneous and free-standing uprising of the laissez-faire impulse is very weird to me, especially when we're talking about _government bonds_, here, which have a crucial role in our entire economy precisely because that is the role that the _government has given them_. It seems rather like saying that the laws of physics broke my neighbor's window because the laws of physics dictated the arc taken by the rock after I threw it.

Another thing: Were you meaning to imply, Paul, that saving money, paying off student loans, and less spending on consumer goods are economically _bad_? Shouldn't that be something we, as conservatives and traditionalists, refer to as "being responsible"? If our economic system is such and our economic pundits and controllers are such that when people start doing those things they say, "Oh, no! We have to start getting people spending again, taking on more debt again, and not paying down their student loans!" and manipulating the economy to that end, then it seems like we have a problem with our economic system, pundits, and controllers.

The arcane maneuverings and fiscal machinations were and are the Rube Goldberg devices of finance. This was part of the problem, inasmuch as people were duped into investing in them because they sounded so technical, and therefore ingenious. This was not, however, the root cause, but rather a symptom. Sure, people lost their shirts when the machine collapsed, but people do die from the symptoms of disease, not the germs themselves.

As far as I see it, the government has much to answer for, Democrats and Republicans alike (for different reasons of course). Even so, the government is not wholly to blame, in the same way as someone running a red light is only 90% to blame for an accident. The market reacted to absurd distortions in a logical manner, that is, it acted absurdly.

1. Inflation, fiat currency, and the Fed are the first suspects. There is no safety in cash, and so it must be put into something, anything, or lose value. Sometimes the interest gained from depositing it within a bank is enough to offset the constant headwind of devaluation, sometimes (like now) not so much. While this does mean that the circulation of money increases, it also robs those who are most tied to liquid and semi-liquid assets and set wages, ie: the poor and middle class. If there is any truth into the old saying "the rich are getting richer..." is because the poor are more exposed to this intentional fraud. Of course, the Left is the standard bearer of devaluation since FDR's day, and fiscally moderate (that is liberal) Republicans such as the Bushes are guilty of this as well.

2. There is good reason for encouraging people to own property. That which is owned is treasured far more than that which is rented. A sense of ownership is a powerful motivation. Even so, the establishment of the CRA, Fannie Mae, the retooling of the CRA, and the tax breaks lead the market to foam. The power of real estate as a commodity has always been great, so building a bubble upon that is going to have a massive upside. The economy has been enjoying a parabolic rise in the value of real estate, and has reacted accordingly. Eventually there simply cannot be enough investment in the finite transactions of property, yet the demand is too great to ignore. As such, the market acquiesced to the demand for investment. This should have been a sign decades ago to pull back, yet to do anything but throwing more fuel upon the fire was political suicide. As such, absurd judgment by the government was piled upon the poor judgment of the past. Even so, all good things come to an end, and the bubble popped. The tragic part in this is that our current government is straining to make a new bubble from the ruins of the one just burst.

3. Taxation...I could rant for hours on the topic. Suffice to say, the tax code is an elaborate attempt at the two opposing parties to choose who wins and who loses. This causes a myriad of distortions to the market, and is perhaps one of the largest contributors to why we have eviscerated our capacity to manufacture goods to ourselves and the world.

4. This time it's not the government, though the government has done its job in aggravating the problem. Has anyone considered what is going on demographically? The baby boom was a wave, followed by a contraceptive trickle known as Gen X, and finally compensated for in Gen Y. Boomers are retiring, and their children (for the most part, though some still live in the basement) having left, have been leaving their houses for condos and retirement communities. These things have been sprouting over the past decade. Gen X is simply too small to make up for the slack, and many of them already have houses. Gen Y is entering the housing market, but only just recently and with little cash on hand. Gen Y will not have the necessary credit rating to supplant losses by the Boomers, nor do they have the income to buy the McMansions that the boomers are leaving behind, and Gen X is still too small. So, what we have is a demographic backslide piled on top of a burst bubble. Housing has nowhere else to go but down.

There are more factors, but as this is the night before finals, I will have to cut it short. Perhaps Lydia can work with this in my stead.

Thus to make out that those effects are somehow a spontaneous and free-standing uprising of the laissez-faire impulse is very weird to me, especially when we're talking about _government bonds_, here, which have a crucial role in our entire economy precisely because that is the role that the _government has given them_.

Lydia, the government did not give government securities this role. That is an absurd statement. No bureaucrats went out and ordered fund managers to plug the US Treasury yield curve as their baseline comparison.

What happened was that in the 60s and 70s, managers began to gradually realize that demand for fix-income assets was growing by leaps and bounds, mostly because of the rise of middle-class investment vehicles, above all (back then) pension funds. So the securities trade was democratized by a private development, out there in the world, wholly separate from government machination. The private sector demanded more and more bonds, of different classes, securities traders obliged them, and the volume and variety of fix-income assets exploded. To develop these new classes of bonds, Wall Street needed a pricing mechanism, a baseline of yield, plotted over time, against which these new securities could be compared. As I said, it all arose out of the spontaneous cooperative decisions of private actors working out their profit-making enterprises, responding to organic demand that existed in the world with no impetus from government.

I brought up Hamiltonian era securities (and I think you really underestimate the mess he walked into), Keynesian deficit spending, and the Fed in order to show that the timeline does not support your assertions. All of these things were in place well before global capital market integration based on debt securities, with the Treasury yield curve as its pricing mechanism, developed. Gentlemen had been trading government bonds, along with private ones, for centuries before modern securities markets appeared on the scene.

The flip-side of the demographics problem is that there is a surplus of housing in the first place because of the post-WWII boom and rise of suburbia. Ultimately, what might happen is massive urban renewal where whole sections of housing are simply plowed under. Paul Erlich had the foresight of an grapefruit when he wrote The Population Bomb.

It seems to me, an idiot in matters economic, that risk-taking is like compulsive gambling. One has to know when to stop.

"one could proscribe all trading in futures by anyone not directly connected to the commodity in question - anyone other than the farmers and those who directly acquire and refine the crops. No Government Sachs driving up commodities futures to make money, least of all by trading their own book."

I like the idea, Max, but what do you do with Monsanto, ADM, etc., who have a direct, but dubious connection to these commodities via their corporate investments and the farmers that farm under their contracts? I'm not much more sanguine (perhaps even less so) about their partcipation in commodity speculation than I am about other "non-related" corporate speculators. It makes my head want to explode when I hear that while food prices go up, and Big Ag profits soar, farm incomes go down.

Of course, this is precisely the type of thing one would expect when usury is no longer considered a sin (if you believe in its existence at all, that is) and avarice has been reclassified from vice to virtue.

I was unclear about the "role" of government bonds, Paul. Sorry. I meant the "role in the economy generally." I'll ask it as a question: If we had only the level of national debt that we had in Hamilton's time, in the monetary system in place at Hamilton's time, would government bonds be picked up by the people you describe to be used as a pricing mechanism?

Let me put this another way: I've suggested in the past that the deficit is a bad thing. You've responded that we have to have it (!) as a pricing mechanism for the entire U.S. and possibly global economy. Now you're saying, "Hey, government debt is practically as old as the country." Fine. Suppose we reduced (and not by printing money) the government deficit to what it was in Hamilton's time. Or suppose we reduced it to, I dunno, five hundred dollars. (No, I'm not saying that it was five hundred dollars in Hamilton's time. That is just an exaggerated example to make a point.) And kept it there. What then? Would that government bond be able to play this role that you have said in the past we can't do without (and have implied again here we can't do without) as a pricing method for the entire global economy?

If you say, "Yes," then I'll say, "Okay, then let's _almost_ get rid of the national debt, and we can have it all." If, as I would guess, you say, "No," if, in other words, we have to have a _large_ government deficit to play this role, then I'm going to argue that if the government hadn't chosen to take on *this much* government debt, the private actors wouldn't have been able to use it in the way you are describing as a pricing mechanism. That's what I've been trying to say, inter alia.

It's the regular issuance of debt that matters. Corporate bonds, asset-backed securities, swaps, etc., are all priced by comparison with government bonds of similar maturity. I can't speak to the technical details of all this, but that's how it works in broad outline and has for decades.

Conceivably a very small government deficit constantly rolled over would perform the same function. The yield curve plots interest rates over time, so the pricing mechanism requires regular auctions at different maturities (that is, different lifespans for the bonds, 6-month, 1-year, 5-year, 10-year, 30-year, etc.) to maintain its baseline. There is no requirement of a big (however defined) deficit, much less a continually growing one; there is only the necessity of regular bond issues, priced at auction with a published interest yield.

In Hamilton's time, by the way, the situation was complicated by the chaos of numerous government entities having floating bonds and issuing paper throughout the Revolutionary War period. The Continental Congress, lacking hard currency, had started issuing "continentals" to pay soldiers; many of the individual states issued paper for various purposes, including funding war expenses; plus private banks had their own paper circulating. The big question for Hamilton was whether the newly established Republic would honor all the public debts as its own, or simply let them default. Plenty of folks were pushing for the latter, and it is a fact that speculators made fortunes going out and buying up old Continental paper and steep discounts from penurious former soldiers, and then profiting when Washington signed Hamilton's bill to assume all those debts as a US obligation.

We aren't going back to commodity money. If one looks at when recovery started for nations during the Great Depression, it tracks when that nation abandoned gold. Pegging ones currency to an industrial metal isn't a good idea.

Recall that we had regular serious depressions and panics under gold and no Fed. Recall also Milton Friedman's criticism of the Feds failure to loosen money during the GD.

Hamilton restructured the debt in order to establish the nation's credit so we could find buyers for our debt because he recognized the necessity of debt (good credit was handy when we needed to borrow to finance the Louisiana. Purchase.

While it would have been nice to start at a lower level, the ability to run large deficits over the past couple of years kept the world out of a depression.

Your concept of the debt seems to be built around ideological talking points without any historical frame of reference - the video you linked for example. Deflation is bad for debtors. One can have problems with QE II but one knows less after that video.

Conceivably a very small government deficit constantly rolled over would perform the same function.

Okay, then let's suggest that the next time someone suggests getting rid of the national debt. "Well, we can only _almost_ get rid of it." No prob. Would be a big improvement, from the perspective of those of us who think the national deficit is a problem.

We aren't going back to commodity money. If one looks at when recovery started for nations during the Great Depression, it tracks when that nation abandoned gold. Pegging ones currency to an industrial metal isn't a good idea.

Gold is not an industrial metal, it is a wealth asset. In fact, physical gold is the wealth asset par excellence, as in my view, following the thinking of the blogger FOFOA, the world will re-discover soon. Which is not to say I think a return to the gold standard is coming, I don't.

Your analysis of the Great Depression is inadequate. In an advanced global economy like that of the early 20th century, a gold standard requires an efficient clearing mechanism to operate effectively. This mechanism was the bill market, bills of exchange drawn on London, which freed gold coin from having to serve as circulating capital and allowed it to serve as the capital base for long-term investment. The bill market was ended by government action beginning prior to WWI when bank notes were made legal tender by France and Germany in preparation for financing the coming war. And the process was completed after the war when the Federal Reserve illegally began open market operations and the renewal of international trade was rejected as not giving the victors enough control over Germany's economy. Soon financial bills, or government bonds, became the primary earning asset for banking institutions, replacing real bills. Without an effective clearing mechanism, the gold standard loses the necessary flexibility to operate in an advanced economy. Friedman's criticism is off-point.

While it would have been nice to start at a lower level, the ability to run large deficits over the past couple of years kept the world out of a depression.

Maybe. The Euro currency was created specifically to allow for an alternative monetary structure capable of handling world trade when the dollar reserve system inevitably comes to an end. It would have ended in the '70s after the US officially severed the gold link except that too many people, wealthy and middle class alike, were doing too well for governments to let the whole system fall apart. Everyone agreed to keep the dollar going, the Europeans began work on a backup system and the oil states required some compensation in the meanwhile and so struck gold for oil deals under the table. Presently, the Euro is established (The Euro is backed to a significant extent by, and marked-to-market periodically against, physical gold. It is not redeemable for a fixed amount of gold.), China, India and Russia are loading up on physical gold and the oil states have locked up significant mine output well into the future via forward contracts. The world is moving beyond the dollar.

Al, the position that "deficits don't matter" is definitely a negative for a candidate in my book, to be weighed along with other negatives and positives, some of them more urgent. Not a lot of politicians on either side of the aisle are bothered as I am about the deficit, though.

"I'm also worried about the inflation of food prices in the US. I'd missed that. A worrying sign."

Maybe, not.

"The CPI for all food increased 0.2 percent from September to October 2010, increased 0.3 percent from August to September 2010, and is now 1.4 percent above the October 2009 level. Over the past 8 months, the food CPI returned to a positive annual growth rate, following 6 consecutive months—September 2009 to February 2010—of annual declines in food prices (a first since 1959). The food-at-home CPI increased 0.2 percent in October 2010 and is up 1.4 percent from last October, while the food-away-from-home index was up 0.1 percent in October 2010 and is also 1.4 percent above last October. The all-items CPI was up 0.1 percent in October and is 1.2 percent above the October 2009 level."

"We do not have all that many examples. Britain's Bank of England started regulating the macroeconomy in response to the industrial business cycle back in 1825. The Bank of France was not far behind. Almost as soon as a country had a capital-intensive industrial sector capable of generating a modern business cycle, it had a central bank to stabilize its macroeconomy."

"The U.S. was an exception. It lost its proto-central bank to Andrew Jackson in the 1830s. It did not acquire a central bank until 1913--and the central bank had no clue what to do in a recession after the death of Benjamin Strong in 1928. The pre-World War II U.S. was as close to an economy without effective macroeconomic regulation as we have--and even there we have occasional monetary and banking policy conducted by the pickup central banks that were the House of Morgan in 1907 and the Belmont-Morgan syndicate in 1895. It was the passage of the Employment Act of 1946 that marked the start of systematic stabilization policy in the United States."

It is useful to remember that it is the free market folks who took the "political" out of political economy.

The U.S. was an exception. It lost its proto-central bank to Andrew Jackson in the 1830s. It did not acquire a central bank until 1913--and the central bank had no clue what to do in a recession after the death of Benjamin Strong in 1928.

Even that US exceptionalism must be qualified. The US did not have a central bank in the 1830-1913 range, but it certainly had government intervention. That was, of course, the age of "internal improvements," above all the state-capitalism of the railroads.

Reading that DeLong post (which is mostly a quotation of someone else), it strikes me that one of the really intriguing thing about the Great Recession for political historians is the fact that it so dramatically bridged across two presidential administrations. Liberals who want to praise Obama's management can elide inconvenient facts all they want, but the pulverizing truth is one of continuity of policy response. The converse is also true. Certainly there are differences in detail, but from Paulson to Geithner we have a clear line of continuous policy.

The one area of Paulson emphasis that has retreated from popular perception is his insistence on the distinction between equity and debt. His bailouts at least had the punitive feature of wiping out equity holders. It was only the structure of debt that he wanted to preserved by state guarantees. I haven't observed this emphasis with Geithner (but then again, there have not been nearly as many huge, dramatic failures of financial institutions under the latter).

It is possible to explain the crisis of 2007-08 (at least in part) by positing that over the course of the preceding decades, debt came to more and more emulate equity in its risk profile. Alongside this, there is the bizarre fact that insurance on risk capital, through a bewildering proliferation of instruments, came to vastly exceed actual risk capital. AIG is ground zero of this weird situation where there are more insurance contracts on exposed wealth then there is actual exposed wealth.

Rob G -- I have read some of Mueller's book. It appears to be an excellent contribution. If we could only get folks like Al to set aside their animus toward the man's Christian orthodoxy, his book might prove profoundly influential.

"Reading that DeLong post (which is mostly a quotation of someone else), it strikes me that one of the really intriguing thing about the Great Recession for political historians is the fact that it so dramatically bridged across two presidential administrations."

Blogs by economists tend to quote at length, at least that's my sense of such things. I don't find the similarity remarkable as what was done has been the standard prescription since the 1820s. Paulson's first request, "give me $700 billion and don't ask any questions," was rightly protested, of course. The FDIC has continued to take out smaller institutions.

The problem with the equity share under TARP is that no corporate governance was undertaken. Ruining the shareholders in the case of these large financial institutions is fair but pointless as the folks who sank the firms still get to keep their freedom and ill-gotten wealth. Both administrations protected the malefactors - a real disappointment but given the Wall Street/government revolving door, hardly unexpected.

I found something interesting in a paper of Mueller's - an almost identical criticism of the Chicago approach to economics as one finds from academics like Krugman and Delong (google freshwater+saltwater+economics). I believe Delong has call it the Great Forgetting. I will read more. I don't have a problem with any religious orthodoxy as long as that orthodoxy's approach to the public square doesn't result in an "ist" mentality.

I think it amounts to the most concise challenge to the secularist viewpoint we've got. As he elegantly puts it, the reason Christians and other believers bring their orthodoxy into the public square is because they have integrity.

Secularists no less than Christians bring a "ist" mentality to the public square: that is, a coherent body of ethical doctrine concerning liberties and obligations.

I see that we are about to have yet another partisan report issued blaming the financial crisis on government mandated lending to those people. Thoughtful folks may want to keep these questions in mind when reading such nonsense.

"To these Reality Challenged people, I pose the following questions:

1. From 2001 to 2003, Alan Greenspan took rates down to levels not seen in almost half a century, then kept them there for an unprecedentedly long period. What was the impact of ultra low interest rates on Housing, credit, the bond markets, and derivatives?

2. How significant were the Ratings Agencies (S&P, Moodys and Fitch) to the collapse? What did their AAA ratings on junk derivatives affect? What about their being paid directly by underwriters for these ratings?

3. The Commodities Futures Modernization Act of 2000 removed all Derivatives from all oversight, including reserve requirements, exchange listings, and disclosures. What effect did the CFMA have on firms such as AIG, Bear, Lehman, Citi, Bank of America?

4. Prior to 2004, Investment Houses were limited to 12-to-1 leverage by the SEC’s net capitalization rule. In 2004, the 5 largest investment banks asked for, and received, a full exemption from leverage restrictions (known as the Bear Stearns exemption) These five firms all jacked up their leverage. What impact did this increased leverage have on the crisis?

5. For seven decades, Glass Steagall separated FDIC insured depository banks from riskier investment houses. Prior to the repeal of Glass Steagall in 1998, the market had regular crashes that did not spill over into the real economy: 1966, 1970, 1974, and most telling of all, 1987. What impact did the repeal of Glass Steagall have on the banking system during the 2008-09 crash?

6. NonBank Lenders: Most of the sub-prime mortgages were made by unregulated non-bank lenders. They had a ”Lend to securitize” business model, and they sold enormous amounts of subprime loans to Wall Street for this purpose. Primarily located in California, they were also unregulated by both the Federal Reserve and the California State legislator. What was the impact of these firms?

7. These firms abdicated traditional lending standards. They pushed option arms, interest only loans, and negative amortization mortgages, all of which defaulted in huge numbers. Was non-bank sub prime lending a major factor in the crisis?

8. The entire world had a simultaneous global housing boom and bust. US legislation such as the CRA or Fannie & Freddie only covered US housing and lenders. How did this cause a worldwide boom and bust — even bigger than that in the US ?

9. Prior to the 2004, many States had Anti-Predatory Lending (APL) laws on their books (and lower defaults and foreclosure rates). In 2004, the Office of the Comptroller of the Currency (OCC) Federally Preempted state laws regulating mortgage credit and national banks. What was the impact of this OCC Federal Preemption ?

10. Corporate Structure: None of the Wall Street partnerships got into trouble, only the publicly traded iBanks. Partnerships have full personal liability for their losses. What was the impact of this lack of personal liability of senior management on Wall Street risk management?

I can go on and on — but the concept is rather simple: If you cannot answer these questions, or adequately explain these facts, then how on earth can you explain the credit crisis?"

"Secularists no less than Christians bring a "ist" mentality to the public square: that is, a coherent body of ethical doctrine concerning liberties and obligations."

Christianists, like their Islamist and secularist counterparts, do far more. "Ists" don't get the boundaries necessary and proper for civil society - one thinks of the Hank Williams song, "Mind Your Own Business." This could be an Islamist going berserk over a silly cartoon, a teacher telling a student they can't read the Bible in school, a yeshiva boy chucking a rock at a moving car on a Saturday, a Christianist using state power to deny strangers access to the law, etc.

"Ists" don't get the boundaries necessary and proper for civil society

The only way to discover those boundaries is by means of a coherent body of ethical doctrine concerning liberties and obligations. Only in secularist theology are such boundaries delivered to us from on high, prior to that "reasoning together" which constitutes the public square.

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